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    Center/accounting/financial Ratios PDF

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    Narmin Jamalli
    Profitability refers to a company's ability to generate income. Financial analysts use profitability ratios like return on equity, return on assets, and net profit margin to assess a company's profitability over time. These ratios can be broken into return ratios, which show profit generated from investment, and margin ratios, which show profit from sales. Net profit margin specifically indicates how much profit is generated from each dollar of sales. Return on assets divides net income by total assets to measure how effectively a company uses its assets to generate profit. Both net profit margin and return on assets are important ratios that vary by industry and can provide different insights into a company's profitability.

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    Center/accounting/financial Ratios PDF

    Uploaded by

    Narmin Jamalli
    22 views1 page
    Profitability refers to a company's ability to generate income. Financial analysts use profitability ratios like return on equity, return on assets, and net profit margin to assess a company's profitability over time. These ratios can be broken into return ratios, which show profit generated from investment, and margin ratios, which show profit from sales. Net profit margin specifically indicates how much profit is generated from each dollar of sales. Return on assets divides net income by total assets to measure how effectively a company uses its assets to generate profit. Both net profit margin and return on assets are important ratios that vary by industry and can provide different insights into a company's profitability.

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    Profitability refers to a company's ability to generate income. Financial analysts use profitability ratios like return on equity, return on assets, and net profit margin to assess a company's profitability over time. These ratios can be broken into return ratios, which show profit generated from investment, and margin ratios, which show profit from sales. Net profit margin specifically indicates how much profit is generated from each dollar of sales. Return on assets divides net income by total assets to measure how effectively a company uses its assets to generate profit. Both net profit margin and return on assets are important ratios that vary by industry and can provide different insights into a company's profitability.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    22 views1 page

    Center/accounting/financial Ratios PDF

    Uploaded by

    Narmin Jamalli
    Profitability refers to a company's ability to generate income. Financial analysts use profitability ratios like return on equity, return on assets, and net profit margin to assess a company's profitability over time. These ratios can be broken into return ratios, which show profit generated from investment, and margin ratios, which show profit from sales. Net profit margin specifically indicates how much profit is generated from each dollar of sales. Return on assets divides net income by total assets to measure how effectively a company uses its assets to generate profit. Both net profit margin and return on assets are important ratios that vary by industry and can provide different insights into a company's profitability.

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    Profitability

    In simple words, profitability is the company’s potential to generate income. Financial analysts and
    investors use profitability ratios to assess a company's profitability in relation to key financial indicators
    such as revenue, assets on the balance sheet and shareholders' equity during a certain time period. The
    capacity of a particular investment to generate a return via its operation is another aspect of profitability
    (T. Adjirackor, et al 2017). Profitability requires more sensitive approach. According to Carole (2012),
    company’s revenue may be greater than its expenditure, assessing assets and liabilities on a balance
    sheet to evaluate financial status is distinct from this. A company with a good financial circumstances
    may not be profitable, and a company with a bad financial position may not be extremely profitable (see
    T. Adjirackor 2017). Profitability ratios can be broken down into return ratios and margin ratios. Return
    ratios illustrate how effectively the companies are able to generate a return from the investment. On
    the other hand, margin ratios show how effectively the companies are able to turn sales to profits.
    Furthermore, return ratios make up return on equity, return on assets and return on capital employed.
    On the other hand, margin ratios includes gross margin ratio, operating profit margin, net profit margin.

    Net profit margin:

    Net Profit margin is the ratio of net profit and total revenue. According to Julie Poznanski, it shows how
    much the organization earns per every dollar of sale. This ratio determines how well your business is
    able to pay all of its operational expenses, particularly indirect expenses. Obviously, high net profit
    margin is always preferable, however, this ratio varies within different industries depending on factors
    such as industry competition, general economic circumstances, debt funding usage, company specifics
    (such as high fixed expenses) (see CHARLES H. GIBSON 2008).

    Return on asset

    Return on assets can be calculated as the ratio between net income and total assets. Return on assets is
    a way to figure out how well a company is using its assets to generate income
    (https://www.everettcc.edu/files/programs/academic-resources/transitional-studies/support/tutoring-
    center/accounting/financial-ratios.pdf). If the ratio is below the industry average, it is possible that
    other corporates in the industry have figured out how to run their businesses more effectively. Since
    ROA evaluates the profitability of all assets, regardless of if they are funded by shares or debt, the
    interest expenditure that is incurred after taxes may be included back into net income (Julie Poznanski).
    Seemingly, return on asset ratio is unique to each industry. Sectors that require greater expenditure in
    the form of capital and require larger amount of long-term assets, could have weaker ROAMoreover,
    ROA is quite similar to total asset turnover but the only difference is that it subtracts expenditures from
    revenue. Compared to total asset turnover, ROA may serve as a more accurate reflection of the
    profitability. Apparently, ROA indicator can sometimes oppose the total asset turnover. While
    organizations have poor ROA indicator, they may have strong total asset turnover ratio. The return on
    asset ratio is mostly favored by shareholders since it demonstrates a company's ability to turn its assets
    into profit rather than only revenue (Henry J. Quesada 2019).

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